Commentaries

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Securitization survives the fall

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A year after the government’s seizure of Fannie Mae, Freddie Mac and AIG , not to mention the bankruptcy of Lehman Brothers that sent the global financial system into a tailspin, very little has changed to prevent debt from being sliced and diced, again and again.

This is a mistake. Although there were many factors contributing to the downfall of the global financial system, the repackaging of toxic debt into esoteric financial products was at the heart of the credit crisis when it erupted in 2007.

It’s easy to forget, particularly when many are focused on anniversary tick-tock accounts of the last days of Lehman Brothers, how nasty CDOs — or worse, CDO squareds — became so incredibly popular in the first place.

Yet, after all the damage, the trillions of dollars lost and the biggest state intervention in financial markets since the Depression, there has been no movement to ban their creation.

Bad debt below 1 percent in China soon?

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After the credit emission in China during the first half, international investors are concerned that bad debt will pile up after three years. Bankers in China are certainly a lot more optimistic.

More than 50 percent of the bankers surveyed by PricewaterhouseCoopers and China Banking Association expect the ratio of banks’ non-performing-loans to range between 1 percent and 5 percent of the total over the next three years. Indeed, 30 percent expect the ratio to be below 1 percent.

The European Commission strikes back

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Reeling from the humiliation of failing to stop Belgian bank KBC paying interest on some of its subordinated bonds, the European Commission has won a new victory in its bid to see bondholders share the pain of bank bailouts.

Acting as a sort-of policeman for Brussels, the UK’s Financial Services Authority has prevented the Royal Bank of Scotland from repaying four subordinated bonds at their first opportunity, causing prices to plunge by up to 15 percent. The Upper Tier 2 euro-denominated bonds fell to between 70 and 75 cents, depending on who you ask.

Russia says “Da” to asset-backed debt

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It’s interesting to see Russia proposing a new law to encourage a domestic securitisation market for consumer debt. Russia is still a novice when it comes to asset-backed debt but seems to have cottoned on to something that not all western regulators have fully grasped — securitisation may have helped get us into the current crisis, but we are also going to need it to get us out of it.

US and European banks simply don’t have enough capital to finance both the loans they kept on their balance sheet and those coming due that were previously funded in by the shadow-banking system. They need to find ways to raise new capital and transfer risk to capital market investors. In short, they need securitisation.

Recycle the TARP

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The U.S. insurance fund for bank deposits is running out of money. At the same time, some of the big institutions that received federal bailouts last fall have repaid more than $70 billion to the Treasury Department, and more checks to the government may be in the mail soon.

Right hand, meet left hand.

Indeed, one way of dealing with this looming crisis at the Federal Deposit Insurance Corp would be to take all that repaid bailout money and simply inject it into the bank insurance fund. Such a move would instantly bolster the deposit insurance fund, which at the end of June had just $10.4 billion in the kitty.

That didn’t take long…

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Turn the calendar to September and markets are fixated about potential problems at the banks again. The obsession with September being a bad month for stocks and for the world in general has nothing to do with it, I’m sure.

I’m certainly the last person to downplay the still tough road ahead given the state of the U.S. consumer, commercial real estate and the excesses that still need to be wrung out of the system, but the fickle trading, especially in the stock market this summer, has made it difficult to read too much into the daily moves.

Banks must see the debate has changed

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Regulators are rarely accused of being too candid. But Adair Turner’s observation that the financial sector is too large has seen the chairman of Britain’s Financial Services Authority swamped by a wave of protest.

Executives, lobby groups and even Boris Johnson, London’s Mayor, have responded with dire warnings about the risks of undermining the financial sector. This knee-jerk response shows the industry still fails to understand the consequences of the crisis it helped to cause. It is high time bankers engaged in a proper debate about their future.

Another EQT buyout goes under the hammer

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Banks will shortly conduct an auction to settle credit default-swaps on debt issued by SSP, the catering group owned by private equity group EQT. SSP recently failed to make a debt payment, according to derivatives trade body ISDA.

It’s not the first EQT-controlled leveraged buyout to run into trouble and trigger a credit event. The first loan CDS in Europe was for EQT’s ceramics products manufacturer Sanitec. The Sanitec recovery was a miserable 33 percent, but that is still by far the highest recovery to date in a European leveraged loan CDS auction.

Naming banks

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A federal judge’s ruling that the Federal Reserve must disclose information about the $2 trillion in emergency loans it made during the financial crisis has been hailed by a number of commentators, including Matthew Goldstein, as a significant victory for transparency and accountability.

But Paul Kasriel, the economist with Northern Trust, wonders if this week’s court decision is a disturbing repeat of a legislative action during the Depression that helped spark bank runs.

Unending pain in CLO land

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Rating firms and analysts have been lowering high yield default forecasts in recent months, but there’s still plenty of pain in store for the banks, insurers (and taxpayers) who own collateralised loan obligations, funds that package leveraged debt.

Here are some cheery stats from Fitch Ratings, which is busy setting about downgrading more European CLOs.

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